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Monday, 7 September 2015

Trade deficit improves a bit

Trade deficit again

Over the June 2015 quarter Australia recorded its biggest trade deficit on record in dollar value terms as you can see in the chart immediately below.

For the first month of the third quarter the July 2015 International Trade figures showed a moderate improvement in recording a deficit of $2.46 billion from a revised $3.05 billion in June.

Still a pretty ordinary headline result, of course, and the 16th consecutive trade deficit, but a slightly better position nonetheless.

Commodity exports

Exports increased by 2.3 per cent in the month but the total value of exports was nearly 8 per cent lower than the January 2014 peak. 

July was a better month for the dollar value of exports of Natural Gas ($1.4 billion) and Gold ($1.6 billion), but not for iron ore or coal.

At this juncture is looks to be more likely than not that net exports will contribute to GDP in the third quarter, having subtracted from it in Q2, though time will tell.

The monthly value of exports to China have bounced back somewhat since March to $7.4 billion but still remain some 20 per cent below their December 2013 peak.

The main driver is clear enough, being a 7.4 per cent decline in the commodity price index in Aussie dollar terms over the year to August 2015.


As a share of merchandise exports for the month China (34 per cent), Japan (15 per cent), Korea (7 per cent) and increasingly the US (6 per cent) were Australia's most important trading partners.

The dollar value of monthly merchandise exports to the US has jumped by an impressive 30 per cent over the past year, but this was more than offset by a sharp decline in exports to Japan. 

State versus state

At the state level a share of monthly exports Western Australia (42 per cent), Queensland (20 per cent), New South Wales (14 per cent) and Victoria (9 per cent) continue to be the major contributors.

The trade balance of Western Australia has bounced back after a big drop in April related to a major import item in that month, while Queensland's trade balance has been improving steadily following several months of deficit in 2014.

Imports moved to record highs in July - which is rather baffling given the substantial decline in the value of the Aussie dollar - and this was reflected in record deficits in the two most populous states. 


The most recent AIG Performance of Services gauge has hinted at the sector humming back to life growing at its fastest pace since March 2008 (55.6), and the red line below shows that the trade services balance has also improved steadily since its nadir in August 2013. 

In a similar vein the tourism sector has bounced back very strongly since a May 2013 low thanks to the lower Aussie dollar and a massive increase in Chinese visitors.

The wrap

Despite the moderate improvement in the month, it was another sizeable deficit in July which underscores a number of the challenges facing the Aussie economy.

Although the services and tourism sector are now expanding in response to the lower dollar - as well as manufacturing and construction now moving into positive territory - the dire dynamic of weakening commodity prices has seriously hampered the international trade figures.

We have an LNG industry poised to make measly bottom line profits, and iron ore and coal companies pumping higher volumes of exports into the face of severely declining prices.

Futures markets have spoken and are pricing in another interest rate cut by February 2016, while the cash rate futures implied yield curve sinks as low as 1.6 per cent by the end of Q3 2016.

The Reserve Bank isn't in to fine-tuning so rates are most likely to be set to be on hold for now, but the easing cycle may well not be over.

A point which is perhaps not discussed as often as it might be is what might constitute a normal or "neutral" setting for interest rates over the next decade.

With housing finance now tracking at around a thumping $32 billion per month and the total stock of outstanding housing credit now surpassing $1.4 trillion as investors load up gleefully on cheaper credit, it seems likely that interest rate hikes in the future will have equivalently more clout in slowing the economy than was once the case.

As a result the neutral interest rate is considered by some analysts to be significantly lower than it has been previously.